[The VAT Act and VAT experts must be consulted before taking a decision based on VAT. Do not make decisions based on this document as tax changes are regularly made and it’s also possible that there are mistakes]

Things have just got worse for property developers, especially those who are already experiencing cashflow problems. But first, an intro to VAT on residential property development.

Residential property developers are usually allowed to subtract input tax related to the materials costs and land purchased (no VAT is payable on labour costs where the construction workers are under the employ of the property developer). Property developers later must charge VAT on the sale of residential property; but in this case there’s no transfer duty which must be paid, as the Transfer Duty Act says that no transfer duties are payable on any property acquisitions where VAT is payable.

(Aside, property developers like marketing that there’s no transfer duties, but buyers should bear in mind that a large amount of VAT is being paid).

If the purpose of the development is to rent out residential accommodation, then the company may not claim VAT on the development or operating costs of the properties, as residential property rentals is VAT exempt.

Renting Property Temporarily

It frequently occurs that a developer can’t immediately find a buyer for a residential property, and temporarily rents out the property for income (and, especially in the case of South Africa) to avoid vandalism and illegal occupation; however there is a VAT implication.

If a property has been developed for resale, and it is later decided to temporarily rent out the residential properties which it is unable to sell whilst a buyer is sought; then in the tax period in which the property being rented out a change in use adjustment must be made in terms of section 18(1) of the VAT Act; and output tax on the open market value of the property is charged.

Up to 31 Dec 2017 relief from the payment of VAT on the rental of the property was provided for 36 months (or until the property was sold, if this happened sooner). This greatly assisted the cashflows of developers who were not able to sell. Section 18B relief no longer applies since 1 January 2018.

Rentals will be VAT exempt.

On selling the property VAT will be charged, and VAT paid on the change in use adjustment can be deducted as an input tax.

Example

10 houses are built at R1m per house; but the property developer only sold 9 of the houses, and decided to temporarily rent out the remaining 1 property. On renting out the final property, output tax would need to be paid on it of R122 807 (R1m * 14/114).

Adjustment to Price

Since the remaining unit couldn’t be sold, it’s possible to argue that the remaining unit has an open market value less than the price at which it’s been attempted to sell it.

Exemption of Residential Property

See 12(c)(i): “The supply of any of the following goods or services shall be exempt from the tax imposed under section 7 ….The supply of a dwelling under an agreement for the letting and hiring thereof, and any “right of occupation” as defined in section 1 of the Housing Development Schemes for Retired Persons Act, 1988 (Act No. 65 of 1988); [Sub-para. (i) substituted by s. 99 (a) of Act No. 32 of 2004]”

Developing Property to Rent

When you purchase residential property for purposes of renting, you may not claim input tax on the purchase price, as residential property rentals are VAT exempt in terms of the provisions of the 18(1) of the VAT Act. Similarly, VAT may not be charged on residential property rentals, as they are exempt. Similarly, if you develop property with the intention of renting, you may not claim VAT on development or operating costs.